Is the guarantee still required today?
More than ever, the banks and lenders today require personal guarantees from entrepreneurs, and even from CEO’s of angel or some VC funded businesses. Starting and running a small or growing business can be a challenge to the most confident and optimistic entrepreneur. And the process of borrowing money or financing asset purchases can be an eye-opener for those who are not used to today’s lender and seller aversion to grant easy credit.
Start with a bank card – still with a guarantee
Most any entrepreneur with a clean credit record can obtain a bank card with a $50,000 limit, if s/he is willing to give a personal guarantee and has enough assets to back the promise it contains. As the amounts get higher or as banks get into the picture, the negotiation around a personal guarantee becomes more of an issue with the lender and the entrepreneur. As a rule of thumb, a company with a majority owner in control will be required to provide such a guarantee for most any borrowing of significant size in relation to assets.
Then what happens when there are investors?
But what happens when the entrepreneur has taken investments from one or more outside investors and may not even own a simple majority of the company’s stock? To most lenders, the guarantee is still a requirement, putting the entrepreneur in a position of additional risk that is not spread among the shareholders.
There are a number of venture debt lenders, however, that will waive the guarantee in return for warrants to purchase stock if the VC backing the company is recognized and has a relationship with the lender.
A novel reward for the entrepreneur from the board
One of my company boards offered the founder with a 20% remaining interest after several rounds a reward for signing two large personal guarantees necessary to grow the business – in the form of a warrant to purchase common shares at today’s common share price. A win-win for the investor and entrepreneur assuming the company does grow and have a liquidity event someday.
All entrepreneurs assume risk when starting and growing a business. It is only smart to consider ways to mitigate risks when opportunities to do arise.